It would be an understatement to say that last month’s RBA interest rate hold decision was a big surprise.

Given this, I don’t think we have to worry about the RBA not cutting next Tuesday from 3.85% to 3.60%.

Inflation validation

The RBA’s final validation for next Tuesday’s interest rate cut was provided by last week’s June quarter inflation data. Core inflation came in at 2.1% and trimmed mean inflation (the RBA’s preferred measure) came in at 2.7% down from 2.9%. 

Both measures of inflation are trending down and well within the RBA’s 2% to 3 % band. 

The RBA’s Job

I don’t understand why RBA had to wait to drop interest rates last month. There are over 1500 people working at the RBA, surely they have access to more precise data about emerging trends than anyone else? 

The truth is the RBA shouldn’t be hesitant and have to wait for definitive data before making an interest rate adjustment decision. 

The RBA’s job is to look over the horizon and be pre-emptive. They do this by clipping the top off major economic uptrends before they fully play out; by raising interest rates to avoid an inflation outbreak and catch a falling economy by cutting interest rates, before unemployment blows too high. 

It takes 6 to 12 months for interest rates adjustments to properly flow through the economy. If the RBA has to wait for definitive data every time they move interest rates, it might mean they are too late to the party. 

Unfortunately the sacking of the previous RBA Governor Philip Lowe (who made some terrible decisions and statements), may be contributing to the current RBA board’s caution.

The economy feels like it is softening.

Let’s hope the RBA is ahead of the curve going forward and not behind it.

Let’s see!